Just How Fatal Are Groupon's Fatal Flaws?

Three Reasons Why the Daily-Deal Company's Troubles Are Deeper Than Just Its Cash-Flow Issues

Almost exactly a year ago, Andrew Mason, the boyishly handsome founder and CEO of Groupon, graced the cover of Forbes. Shirt untucked, hands in his pockets, he grinned widely against a green background -- dude was totally money -- next to the headline "GROUPON IS THE FASTEST-GROWING COMPANY ... EVER." As business-rag hagiography goes, it was not quite as egregious as that notorious August 2006 BusinessWeek cover story featuring a widely grinning Kevin Rose -- founder of then-hot, now-also-ran Digg.com -- under the headline "HOW THIS KID MADE $60 MILLION IN 18 MONTHS" (a half-assed guesstimate of Rose's paper wealth based on Digg's VC-inflated "valuation"). But it was still pretty galling given what we now know about the exact nature of Groupon's cash-hemorrhaging "growth."

Somehow, all these many years into the internet era, media-darling startups are still largely exempt from journalistic queries along the lines of "Does it sound too good to be true?" The due diligence needed to supply the obvious answer -- "Then it probably is " -- is typically done way too late.

Daily-deals company Groupon has lately been subject to a truly brutal media pile-on thanks to some ugly pre-IPO revelations the company just made to the SEC about its financials. It's simply spending way too much money to chase after growth, which has some observers suggesting that if Groupon would just get its managerial act together (slash expenses, Mr. Mason!), it could thrive. But I think Groupon's problems are much more systemic -- and existential. Specifically:

GROUPON TAKES A MASS-MEDIA APPROACH IN THE AGE OF HYPER-TARGETING.
The business press somehow took the fact that Groupon is "local" -- it goes after consumers and advertisers in specific cities -- to mean that it's "targeted." Sorry, no! Though Groupon has recently been attempting to modernize itself with, for instance, Groupon Now mobile deals, it's still generally very old-school in its M.O.: For the most part, a Groupon subscriber in any given city gets the same damn offer as every other Groupon subscriber in that city. Which means Groupon is in the business of pestering the uninterested with unwanted offers -- how much 60%-off laser-hair-removal sessions do consumers really need?! -- couched in "witty" prose. This in the age of hyper-targeted marketing. (Watch for nascent competitors Google Offers, Facebook Deals and Amazon Local to do what Groupon can't: reach the right customers with the right offers without alienating other customers.)

GROUPON'S PRESUMED CUSTOMER BASE IS WAY OVERBLOWN.
A week ago, Reuters reported that Groupon has "more than doubled" its subscribers to 115 million so far this year. There's a useless number! Anybody who has worked in the e-newsletter space (as I did when I launched Very Short List for IAC) knows that what matters is open rates -- and seeking hyper-growth in subscriber rolls (remember Groupon's idiotic Super Bowl spots?) can send opens plummeting. Customers who grow sick of your messages (or weren't really that interested in the first place but signed up because they were wondering what all the fuss was about) often won't bother unsubscribing; they'll just stop opening your emails.

GROUPON IS LIKE DIRECT MAIL WITHOUT DIRECTION.
On May 23, I published a a wry post
on AdAge.com suggesting that Groupon had clearly jumped the shark because the deal the company was offering that day in its own backyard was for 250 $20 nosebleed seats at a NKOTBSB (New Kids on the Block/Backstreet Boys) nostalgia-tour concert at Allstate Arena in Rosemont, Ill. To fill those 250 seats, Groupon blasted hundreds of thousands of its Chicagoland subscribers with an irrelevant offer.

Basically, in a lot of ways, Groupon is old media masquerading as new media. It's spending boatloads of money to deploy one of the creakiest conduits of the internet era -- noncustomized email -- to reach tiny clusters of consumers inefficiently.

Which isn't to say that I'm not happy for the 250 budget-conscious suburban moms who got to confirm in person that Jordan Knight is still a dreamboat at age 41. And if any of those moms have mustaches or stubborn patches of thigh hair, far be it from me to begrudge them for getting it zapped off on the cheap.

But please, Groupon: It's 2011. Can't you leave the rest of us out of it?

Simon Dumenco is the "Media Guy" media columnist for Advertising Age. Follow him on Twitter @simondumenco.